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65 Cards in this Set
- Front
- Back
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What must occur if a customer refuses to provide complete financial information
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- the RR may not make assumptions about the customers finances and may only make recommendations based on the information disclosed by the customer
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what do financial considerations include (4)
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- investors occupation
- income - net worth - tax situation |
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what determines cash flow
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- the money the customer is recieving and the expenses being paid by the customer
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what three reasons is the personal income statement important
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- shows what sources the person's income is derived from
- statement tells us about the customers lifestyle - subtracting a customers monthly expenditures from his gross income gives us the customers discretionary income |
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what is earned income
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compensation recieved for providing good or services
- includes salaries, commissions, and wages earned thorugh employment |
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what is earned income tax bracker sometimes referred to as
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- marginal rate of taxation
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what is passive income derived from
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- a business venture in which the investor does not have an active role
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what is limited partnership also called
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direct participation program
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how is passive income taxed
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same manner as earned and investment income
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what is the only difference between passive income and earned income
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passive loses may only be used to offset other passive income or gains
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what are passive items not used to offset
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- earned income or portfolio (investment) income
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when is a cash dividend taxable
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in the year of receipt
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when are stock dividends taxable
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not taxable at the time of reciept, instead the stockholder must adjust the cost basis per share of her position in the stock
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What type of taxation are corporate bonds subject to
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federal, state and local taxation
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what type of taxation are US government bonds subject to
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federal but not state and local taxation
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what type of taxation are municipality bonds subject to
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state and local are dependant on issuer and customer specifics but not federally taxed
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wjat os deferred omcp,e
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earned in an account in which taxes will be paid at a later date
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what are progressive taxes and examples
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graduated such as income, gift, or estate taxes
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what are regressive taxes and examples
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flat such as sales tax, excise tax or SS tax
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How is most investment income taxed
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as ordinary income based on the individual tax bracket
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what percent is dividends taxed at
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- if the dividends are on stocks held for more than 60 days from teh ex-dividend date it will be taxed at a max rate of 20 percent
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what is dividend from REIT taxed at
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ordinary income rates since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income
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what does AMT stand for
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alternative minimum tax
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what is AMT
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a method of calculating tax liability for wealthy tax payers
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why was AMT orginally introduced
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to ensure that wealthy individuals who derived income from certain types of investments would pay at leas ta specified minimum amount of taxes and would not be able to avoid paying taxes all together
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what occurs under AMT rules
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- taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method and then he must recalculate his tax liability using the AMT method and taxes are due on the greater of two calculations
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what are the current gift tax limits
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14k per year to any number of persons without incurring gift taxes
- married can total 28k per recipient |
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what is the married deduction
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allows a husband and wife to give each other an unlimited amount of property without incurring gift tax
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when are capital gains generated
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when an invest is sold for greater value than its cost basis
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what is the difference between short term and long term capital gains
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short term are less than a year and taxed at ordinary tax rates
long term are greater than a year and taxed at a maximum rate of 20% |
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when are capital loses generated
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when an investment is sold for less value than its cost basis
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how does netting capital gains and losses work
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permits an investor to net (offset) capital losses against capital gains with no maximum dollar limit
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how does netting capital gains work if ther eis a net long term gain and a net short term loss
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they must both be netted before the 20% tax rate applies
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what can net capital losses be used to offset
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ordinary income on a dollar-for-dollar basis in any tax year, up to a maximum of 3k
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what does filing as head of household allow
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- qualifies the individual for lower rates and a higher standard deduction
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what should the RR document on a personal balance sheet
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total assets and total liabilites
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how do you calculate net worth
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total assets- total liabilities
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what are the three main types of assets
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- tangible
- investments - savings |
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what are tangible assets considered
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real estate and personal property
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what is as important as knowing the net worth of a customer
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knowing the composition of the customers current portfolio
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what do liabilities represent
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what the customer owes to creditors
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what is a more realistic assessment of a person's net worth
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liquid net worth
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what is liquid net worth
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excludes assets that are not readily convertible into cash, such as real estate, limited partnerships and stock in small companies
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what is a time horizon
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the amount of time a customer has available to achieve her financial goals
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what does asking about previous investment experience provide
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insights about customers ability to understand the RRs investment recommendations and accompanying risks
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what is risk defined as
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chance taken when an investments actual return will be different from its expected return
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what does suitability dependent o
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whether the investment was appropriate for the customer, given all the circumstances, not on simply whether the customer could afford the losses
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what is risk tolarance based on
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- financial resources
- values - attitudes |
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what is capital reserve
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most people should have a cash reserve equal to at least three months living expensives and should be kept in safe liquid investments such as money market fund
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what is the preservation of capital goal
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- want a return but dont want principal at risk
- customers often invest in US government securites, insured certificates of deposit or money market funds |
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what is liquidity investment objective
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access to funds in short periods, money market mutual funds and t-bills may pay a lower return than other investments but the principal is relatively safe and investors will have ready access to their capital
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what is current income investment objective
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- investments that produce a steady realiable streme of cash such as bonds, preferred stocks and fixed annuities but produce little if any growth
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what is growth investment objective
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- want capital to appreciate for some future use, common stock and equity mutual funds are examples of growth instruments
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what can erode purchasing power of retirees income
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inflation if retired investor has a portfolio constructed for income and preservation of capital
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what income equivalent do most people need in retirement
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equivalent to 70% of their current pretax income when they retire
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what two things are required for RR to recommend speculative investments
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- customer has sufficient financial resources to bear the loss
the customer understands the risk involved |
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what 9 things are included in an investment profile
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- age
- other investments - financial situation and needs - tax status - investment objectives and experience - investment time horizon - liquidity needs - risk tolerance - any other information obtrained from the customer |
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what are the three main suitability obligations
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- the reasonable basis obligation
- the customer specific obligation - the quantitative obligation |
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what is the reasonable basis obligation
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- requires a member firm and its RR to have a reasonable basis to believe that a recommendation is suitable for at least some investors
- if a firm or its RR do not understand a product it should not be recommended to customers |
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what is the customer specific obligation
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- requires a member firm and its RRs to have a reasonable basis to believe that a recommendation is suitable for a particular customer based on the customers investment profile
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what is the quantitative obligation
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requires a member firm and its RRs to have a reasonable basis to believe that a series of recommended transactions even if they are suitable for a customer are not excessive when considering the customers investment profile
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what are the two guidelines for a broker dealer to determine the extend of its suitability obligations regarding an institutional customer
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- the firm and the RRs servicing the account must hav ea reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in regard to the specific securities and different investment strategies
- institutional customers must affirmatively state that it is exercising independent judgement in evaluating recommendations |
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what are four main activities that would violate fair dealings with customers
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- recomendations for purchases that are beyond the customer's ability to pay
- excessive activity in customers accounts (churning) - trading in mutual fund shares that, by their nature are not suitable trading vehicles - fradulant activities |
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what is address changes important
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- the RR must be registered in that state
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what are the FINRA account updating requirements
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- the broker- dealer must send a copy of revised account record to the customer within 30 days after receiving notification of the change or at the time the next statement is mailed
- if the request to change is made within 30 days of the change notification must be sent to both the previous address on file and to the registered personnel who are responsible for the account |
